I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

Finding Little Evidence Of Foreclosure Fraud, Feds Give Up

Over at the Huffington Post they’re still talking about “rampant foreclosure fraud.” But I was always skeptical of claims banks were stealing houses from innocent homeowners. One big problem with that theory: Banks lose money on virtually every house they take back in foreclosure. And now the federal government seems to agree.

With a pair of terse notices yesterday, the Office of the Comptroller of the Currency basically admitted that its elaborate process for turning up evidence of fraud in hundreds of thousands of loan files was a waste of money.

With the $8.5 billion settlement with Bank of America, Citi and other lenders, the government abandoned the Independent Foreclosure Review and switched to a system of direct grants to foreclosed borrowers, details to come. In a statement, Comptroller of the Currency Thomas J. Curry said “it has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers.”

The New York Times reported today concerns grew “in the upper echelons of the comptroller’s office” at the cost of the loan reviews, which consumed up to 20 hours per file at $250 an hour. Banks spent $1.5 billion on this snipe hunt without turning up meaningful examples of fraud, the Times reports. That money could have been handed out to borrowers in the form of a $5,000 check for each file.

The outcome shouldn’t come as a surprise. After I wrote a piece critical of the parallel mortgage settlement with state attorneys general last year, comparing it to the deeply flawed tobacco settlement, I was barraged with comments from critics accusing me of downplaying foreclosure fraud. I responded with one simple question: Has there been a single case in the past five years of a homeowner who was current on his mortgage being foreclosed through fraud? Silence. I did get a lot of legal gobbledygook from marginally competent lawyers who, as it turns out, were the real crooks in the foreclosure crisis. For excessive fees, they offered underwater borrowers the false hope they could somehow keep their homes without paying for them, either by challenging the foreclosure paperwork or convincing a judge that the national registry system known as MERS was not the legitimate party to foreclose. Those tactics mostly failed. The Federal Trade Commission has a website devoted to protecting borrowers from the real scammers in the foreclosure crisis, and prosecutors have found plenty of fraud. Last September North Carolina AG Roy Cooper, for example, sued three foreclosure assistance firms for charging upfront fees and delivering nothing in return.

The reality is robosigning couldn’t have been the cause of foreclosure fraud because robots can’t engage in the self-interested behavior that underlies fraud. Robosigning was just an acknowledgement that in a large, modern lending institution only the central computer registry of mortgages contains all the information about loans, and no lawyer at the periphery can possibly possess additional information beyond what is in that registry. It may be nice to conjure up the image of a kindly loan officer, familiar with the circumstances of every person behind every home mortgage, but that’s not how the system works in big banks.

The OCC released an interim report on the Independent Foreclosure Review program last June, detailing the agency’s ambitious plans for getting to the bottom of foreclosure fraud. It sent out letters to 4.4 million borrowers, ran ads in 1,400 publications including Parade, People magazine, and USA Weekend, as well as Hispanic and African-American publications, and racked up an estimated 341 million impressions. Nearly 200,000 people submitted their files for review and regulators selected another 142,817 files for “look-back” reviews.

But by retreating to a class-action style payout system, where borrowers simply receive lump sums, the feds seem to be acknowledging that there wasn’t much outright fraud — as in banks stealing houses from innocent borrowers — to find.

Fraud is a flexible term, of course, and many lawyers think it includes lending money to people who have no hope of paying it back. This so-called “predatory lending” doesn’t make any economic sense, unless you’re willing to buy the theory that the fees flowing from an ultimately unprofitable loan were enough to induce bankers to destroy their own institutions in search of a year-end bonus. That’s possible, but it downplays the responsibility of the borrowers who signed detailed loan documents, filled with caveats and cooling-off periods mandated by federal regulators.

As for robosigning computers stealing homes, still not much evidence for that. If you know of a case, do let me know.

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The banks are paying billions of dollars because of this fraud, and investors lost billions more. The question is whether homeowners lost money because the wrong person signed their mortgage documents.

Homeowners who were able to make up any arrears, but were thwarted by fraudulent fee additions as a requirement of catching it all up, lost money. Homeowners who had hidden increases through variable rates/undisclosed ARMS, lost money. Homeowners who had appraisals that were hugely inaccurate, in order to “feed the machine”, lost money. Homeowners who depleted 401ks in order to keep a property for as long as possible, faced with job losses due to this wall st/bank created odyssey, lost money. Homeowners who, because banks can’t foreclose in many circumstances due to their own internal fraud, or that of their hired legal hands, walk away, facing ongoing past due payments accruing into what could be an eventual deficiency judgement, lost money (as the house sits rotting). Oh- and let’s not forget the homeowning neighbors, faced with these properties and declining values- yes, they’re losing money, too. So much money lost, yet you are questioning a pittance of a fine, wondering about the “deadbeats”. Daniel, that is so 2010.

Did the Feds REALLY give up…Elijah Cummings appeared a bit “disappointed” in the Feds & OCC NOT responding to the request he wrote in his letter to them on Friday! Here is is comment:

Washington, DC (Jan. 7, 2013)—Today, Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform, issued the following statement regarding the public announcement of a new settlement between the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and 10 mortgage servicers without first briefing the Oversight Committee as requested on a bipartisan basis last week:

“I am deeply disappointed that the OCC and the Federal Reserve finalized this settlement and effectively terminated the Independent Foreclosure Review process before providing Congress answers to serious questions about how this settlement amount was determined, who these funds will go to, and what will happen to other families who were abused by these mortgage servicing companies, but have not yet had their cases reviewed. I do not know what the rush was to make this settlement without answering these key questions, and although I look forward to obtaining information about how this deal may assist homeowners, I have serious concerns that this settlement may allow banks to skirt what they owe and sweep past abuses under the rug without determining the full harm borrowers have suffered.”

hello to all i just want to start with my family is just middle income ppl….but this is my story…owned home for17 yrs…12 yrs ago our son was hurt badly at age of 3, to point i quit job to be with him and we lived on one income not missing one payment…6 yrs later i lost both breast to cancer at 36 and fought hard n returned to work after 8 wks cause we knew we needed to keep house up in to which during then didnt miss a payment…in 2009 i had enlarged ovary removed at sametime i lost 1 of the cases i worked and had only 1 with the state n took a pay cut along with my husband taking a lg pay cut also, and at that time we seen that we needed to file bankrupt which we did in july 09 filing med bills but not home which we stayed current on and have proof with bank statements all was paid and insurance right up to date all went down..we had court date end of sept 09 and was not discharged till mid dec 09….and my sister was going to move in our home so we stated to move this out , now our payment was due on oct 1 with a grace period of 10 days but on oct 6 we came home and the bank had a lock on house, husband called asked y they said cause we left (OK weird our things were in there) husband told them my sister was moving in and we didnt know y they locked doors when we r current…he told them she was moving in cause our arm was coming and we knew we couldnt pay that but wanted our home so she was going to pay it starting in dec but we were paying the oct and nov and then asked can u help us with this arm and they said there was nothing they could do …the home stayed locked and not even a wk after they locked it they came and our neighbors watched them clean our home out and take our things away…at that point NO we did not make the oct payment y would we ..and never heard a word from them till papers came for foreclosure and to which we never would have been pushed into since we were current up till they locked home up…which then yes it became behide for we were not going to pay on something when it was taken for no reason ..we were current only becoming be hide because of them…they never offered anything to help with arm….so i m sure they will have away around this and it sad for we did pay and through all my health and what my family went through. so this is my story nd like i said i do a have proof to bad i will never beable to show it to prove what they done and i just have to take whatever is given to us ..which could be nothing. Hoping for the best.

You have got to be kidding, you call yourself a journalist, but are undoubtedly so mis-informed. Where did you get your information from ? My 3 yr old grand daughter can no doubt tell a more honest and truthful story. You my friend,and I say that loosely, are so full of yourself and crap, that it is not even funny. Don’t talk the talk, until you can walk the walk.

I thin it’s a net positive that you interact with people, especially after a controversial piece. There really was substantive fraud — the banks have admitted that — the question is how much damage did the fraud cost to borrowers?

Besides raw dollars there are also strong public policy issues surrounding the fraud. For example, we know individuals end up in trouble if they lie on mortgage applications. That’s a felony and people have been sentenced to relatively long prison sentences. But when bank lawyers or bankers do the same thing little or nothing happens to them.

I think that’s why people are so emotional on the subject: there’s a strong sense of a double standard at work. Since there’s already a great deal of hostility based on double standards in the bailouts — reckless borrowers are thrown under the bus; reckless lenders are bailed-out (despite having substantially more knowledge) — people have just had it with bankers being treated like American Oligarchs. Who knows if the banks are really too big to fail — we didn’t let them fail so the question remains unanswered — but the failure of the American middle class would also prove a moral and financial disaster.